Connecting ESG & Financial Markets I
GLOBAL COAL TO CLEAN POWER | TRANSITION STATEMENT
What Does the Agreement Entail?
The Global Coal to Clean Power Transition Statement aims to get countries to commit to end investments in new coal power plants both at a national and international level while energy-efficient measures are established.
The signatoires also pledged to ‘phase out coal power in the 2030s for major economies and in the 2040s for the rest of the world’ (NBCU, 2021). However, the world’s largest energy powers such as the US, China, India, Russia, and Australia did not sign the agreement.
Disclaimer: This agreement is non-binding in nature.
What Role Do Investors Have Given its Strategic and Economic Importance?
Some countries have already started to close or sell their coal power plants. Others, such as France, don’t have the chance to do so because of supply issues. The main concern is that is not in Europe or Latin America where main coal power production is happening, but in those countries that didn’t sign the transition statement.
China, for example, is highly dependent on coal and generated 53% of the world’s total coal-fired power in 2020 (Reuters, 2021). Its electricity crisis has been solved solely due to fluctuations in coal price and supply issues. China’s domestic production will create an economic and social dislocation as investment in the West has decreased and, unlinke in the East, keeps doing so provided the higher proportion of sustainability-oriented investors.
Although France mainly relies on nuclear energy, it also needs non-thermal power stations aside from nuclear, which are generally coal and gas.
Banks and insurance companies are very slow at cutting support for fossil fuels, an industry to which signing nations also committed to cut all investment. Aside from the emissions discussion, as investors, we need to think deeper.
Although utilities might sometimes be an odd sector, they have the potential to generate reliable earnings, as they allow companies to pay above average dividends. Even if this sector does not reinvent itself to become low carbon, companies will still provide returns to investors as power utilities especially are needed to ensure the smoothness of our economy and therefore out global financial system.
We should not forget, however, that companies of this nature are also co-invested by governments, which will be have the final say on when we will truly move away from fossil fuels and other high-polluting power-generation sources.
Even though our investment portoflios might not be directly impacted by this agreement, there will be an increase in both political and regulatory examination. By Q4 2023, all large businesses and public corporations will be required a net-zero transition plan. But, why should we care?
Those companies which do not begin to take action will face certain challenges. Some of their activities might be affected by upcoming regulations, negatively affecting their costs. Moreover, negative press as well as customer reviews could undermine the company’s image — and therefore decrease its profitability. So what’s next for investors?
As we move away from fossil fuels, profitable opportunities can be found in emerging industries such as renewable energy or EVs. Adding the ‘E’ (Environmental) factor to our investment decisions will positively affect long-term investments. Yet the market didn’t react to any of these announcements.
The stock market doesn’t usually account for long term risks. Additionally, the language used during the summit was too ambiguous to infer any certain changes in the global economy. Once there is a detailed statement with enough credibility shares’ prices will be impacted. Being especially aware of where non-signatoires stand is the key to mitigate some risk.
As briefly mentioned, many industries appear as an opportunity for value investors. There is potential in the market, especially for players in the supply chain for climate solutions. On top of that, new climate tech is already becoming a reality.
Some figures that might be relevant to consider include:
- 450 banks, insurers, and asset managers with a combined $130T of capital committed to reaching net zero by 2050.
- New companies, regions, and countries were added to the Powering Past Coal Alliance — world’s largest alliance on phasing down coal power. Financial services companies with a combined $17T of AUM are also part of the agreement.
- The IFRS stated the formation of an International Sustainability Standards Board which aims to develop sustainability reporting standards, making it easier for investors to not only view but also compare sustainability commitments made by companies.
After the COP26, the asset management industry has began to realise the need of a fair transition to net-zero, slowly shifting its perspective towards investments that have a higher take on either inclusivity, engagement, and collaboration — as well as divestment.
We need to be critical about the increasing involvement that the financial services industry has in this regard as credibility and transparency need to be found behind these pledges and statements. When investing in funds, it is important to ensure that these are run by managers that make an active effort to investigate the potential impact that these sort of agreements have on the funds’ investments both at a short and long-term.
Sustainability is much more than the environment, but the Coal to Clean Power Transition Statement is directly linked to the first part of ESG: The Environment.
WHAT DO YOU THINK?
Will the global financial community start working hand in hand with policy makers? Will it support the low carbon energy as a new form of energy industry?
If so, what would this mean for your investment strategy?
